Why This Rally May Be in Trouble

by Sam Collins | October 21, 2013 7:23 am

Why This Rally May Be in Trouble

The S&P 500 rose to its third consecutive new high on Friday. But it was the Nasdaq that again stole the show, rising 1.3%, thrust forward by a 13.8% gain in Google (GOOG[1]), which topped $1,000 a share.

The tech sector led with a gain of 1.7%, mostly as a result of Google’s’ big day. But other major tech stocks experienced losses. IBM (IBM[2]) fell 0.6%, Qualcomm (QCOM[3]) lost 0.4%, and Intel (INTC[4]) dropped 0.2%.

The industrials also showed a gain, up 1.1%. That sector was propelled by a 3.5% jump in General Electric (GE[5]). GE’s industrial division helped to offset weakness on the financial side, and earnings beat analysts’ expectations by $0.05.

The industrial sector of the S&P 500 also gained as a result of heavy buying in the transportation sector. The Dow Jones Transportation Average rose 1.2%. Its top performer was Kansas City Southern (KSU[6]), up 3.7%.

At Friday’s close, the Dow Jones Industrial Average gained 28 points at 15,400, the S&P 500 rose 11 points to 1,745, and the Nasdaq was up 51 points at 3,914. The NYSE traded 892 million shares and the Nasdaq crossed 552 million. Advancers outpaced decliners by 2.5-to-1 on the Big Board and by 2-to-1 on the Nasdaq.

For the week, the Dow gained 1.1%, the S&P 500 rose 2.4%, and the Nasdaq jumped 3.2%.

The S&P 500, the major index for broad-based stock performance, has moved to new high ground despite the debt ceiling crisis. But it is now bumping into the bullish resistance line of its trading channel at 1,750. Traders usually take profits in this area, especially when volume doesn’t rapidly expand.

Conclusion: The S&P 500′s new high is impressive. There is no more positive indicator than when stocks move ahead against adversity. However, the question now is, “Can the rally be sustained?”

In the absence of the government’s usual economic reports, how much real adversity has the market sustained? It is possible that this bull has been advancing in a vacuum? For example, the impact of the September jobs report has yet to be determined. It is scheduled to be released on Tuesday.

And, during the absence of the usual headwinds, a new, more liberal head of the Federal Reserve was named, pushing the termination or even the “tapering” of the Fed’s bond buying program well into next year. This alone may have been the reason for much of the rally.

I mentioned the strategy of “buy the rumor, sell the news” last week. Now, as the government’s delayed reports hit, along with more corporate earnings, we will see if this bull has been floating free or if he really has the power to charge through the economic obstacles and the next technical barrier at S&P 1,750.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here[8].